Beneficiary issues

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    Who would a beneficiary be?

    This month we will be looking at some definitions, rules and practice affecting beneficiaries. More unusual situations involving beneficiaries are examined, although these may not be beneficiary situations that you meet every day, when they do arise it is important to have an understanding of how such circumstances are met by statute and in the common law.

    The testator’s instructions:

    The starting point for the discussion is that the instruction taker and the will drafter, who may not necessarily be the same person, must ensure that the testator’s wishes are interpreted with absolute certainty otherwise a gift to the potential legatee may fail.

    The only two certainties in life it is said are death and taxes and when taking instructions for a will the order in which death occurs as between the testator and those who are to receive his bounty is unknown. Where the beneficiary named by the testator predeceases either having died before the will is executed or dies before the testator the gift generally is invalid and lapses.

    The doctrine of lapse:

    In order to avoid such an eventuality the draftsman may provide a giftover, for example using the provisions of the Administration of Estates Act 1925, Schedule I, part II which determines the order in which the assets of an estate, being solvent, are applied. (These provisions were examined in the earlier topic on abatement.)

    It is not possible to exclude the doctrine of lapse from a will, however it is possible to ensure that the gift is worded so that the subject matter can pass to another beneficiary in the event that the chosen beneficiary predeceases the testator (a giftover); this giftover may name the beneficiary’s personal representatives, or their children or to another named person or body.

    Inheritance tax is not charged on the death of a beneficiary who dies before the testator, either on the testator’s estate or on the beneficiary’s estate as the estate is not increased by the gift.

    Common among clauses that avoid the doctrine of lapse are gifts for the benefit of the testator’s children that provide for the gift to pass to the issue of a child in the event that that child predeceases the testator. The doctrine of lapse will not apply to gifts between joint tenants, but does apply when the beneficiaries are to take as tenants in common. Lapse of a settled share can be avoided by including a specific provision dealing with that circumstance.

    When making class gifts it is important to consider the effect on the gift if one of the persons who would have been part of the class predeceases and to make provision for the subject matter to be fully distributed in these circumstances. A gift will still be a class gift even though not every person who makes up that class is included within the class – for example where a gift to children is made, but excluding one of that number.

    Exemptions to the doctrine of lapse:

    There are only 2 circumstances where an exemption to the doctrine of lapse operates;

    1) In common law a gift to settle the debts of a beneficiary is understood not to lapse when the beneficiary predeceases the testator. The payment of the gift in settlement of any debts is saved because it is understood to imbed a moral obligation, even though the debt may be statute barred.

    2) The second exception to the doctrine is found in s33 Wills Act 1837 as substituted by the Administration of Justice Act 1982 and applies when a testator dies after 31 December 1982.

    Section 33(1) provides that:

    a) where a will contains a devise or bequest to a child or remote descendant of the testator; and
    b) the intended beneficiary dies before the testator leaving issue; and
    c) issue of the beneficiary are living at the testator’s death,

    then unless a contrary intention appears in the will, the devise or bequest shall take effect as a devise or bequest
    to the issue living at the testator’s death.

    Section 33(3) continues:

    Issue shall take under this section through all degrees, according to their stock, in equal share if more than one,
    any gift or share which their parent would have taken and so that no issue shall take whose parent is living at
    the testator’s death and that no issue shall take whose parent is living at the testator’s death and so capable
    of taking.

    Section 33 applies to contingent gifts. But it is not clear whether a substituted beneficiary is subject to the
    same contingency and therefore it is necessary for the position of a substituted beneficiary to be made clear
    with respect to the contingency.

    Section 33(2) deals with class gifts; again subject to the will containing an express contrary provision.

    Section 33(4) clarifies the effect of the section where a person is either i) illegitimate or ii) a person conceived
    before the testator’s death and born thereafter is taken as being alive at the testator’s death.

    Section 33(1)(a) applies only to a gift made to a child or remoter descendant of the testator. In all other cases
    only an express substitutional gift included in the will can take effect. In order to avoid doubt it is imperative
    therefore that in all cases the testator’s intentions regarding substitutional gifts are made clear by express
    provision. It is common practice therefore to exclude the effect of Section 33.

    The order of death:

    Where there is uncertainty about the order of death section 184 Law of Property Act 1925 confirms that the
    order is laid down by the Act. Section 184 provides:

    In all cases where, after the commencement of this Act, two or more persons have died in circumstances
    rendering it uncertain, which of them survived the other or others, such deaths shall (subject to any order of
    the court), for all purposes affecting the title to the property, be presumed to have occurred in order of seniority,
    and accordingly the younger shall be deemed to have survived the elder.

    Note: there are exceptions to this rule in relation to intestacy, see Administration of Estates Act 1925 s46(2A)
    and (3).

    When should the exclusion of s184 be considered:

    i) In the event of an accident and the order of death is not known;

    Where inheritance tax is in point thought needs to be given as to whether the application of a survivorship
    clause imbedding the provisions of s184 should be excluded from the will of the elder spouse or civil partner,
    where the testator and his spouse or civil partner die in such circumstances and each has left his estate
    outright, to, or has created an immediate post-death interest for, the other. The benefit of including the s184
    provisions should be considered along with the provisions of s4 Inheritance tax Act 1984.

    S4(2) IHTA1984 states that where there is uncertainty about the order in which the deaths have occurred, the
    deaths are treated as having occurred at the same instant, that is simultaneously, and the estates are therefore
    taxed separately. But s4(2) does not override s184; with the effect that the estate of each spouse or civil
    partner passes under the terms of his own will, and accordingly as the younger is deemed to survive the elder,
    the estate of the elder is deemed to pass to the younger surviving spouse or civil partner. The transfer escapes
    inheritance tax as the Inheritance Tax Act 1984 s18 spouse exemption still applies.

    Therefore in the circumstances where the order of the deaths cannot be established the younger is deemed
    to have survived the elder, but having died at the same instant. The estate of the younger cannot include
    assets inherited from the elder and those assets therefore escape a charge to inheritance tax on the death of
    the younger spouse or civil partner.

    ii) To ensure that both nil rate allowances are used:

    As we have seen previously on the death of a testator an unused nil rate allowance can be claimed on the subsequent death of his spouse or civil partner.

    Using a survivorship clause can restrict the full use of both nil rate allowances where the surviving spouse does
    not have sufficient assets to make full use of their nil rate allowance. For example where H and W both die
    within the period specified by the survivorship clause (but not in the same instant as required by s4 above)
    and H has assets in excess of the nil rate band then H’s estate passes as if W had died before him and his nil
    rate allowance is fully used. But if W does not have sufficient assets to use her nil rate allowance fully, it is not
    possible to transfer her unused portion to her spouse who has died before her.

    If the will had not contained a survivorship clause H’s estate would have passed to W and both nil rate
    allowances would have been fully utilised. The mischief could possibly have been overcome, that is the failure
    to use both nil rate allowances fully, after the deaths by using a deed of variation transferring sufficient assets
    to the estate of the surviving spouse and making full use of her nil rate allowance. However where the
    residuary beneficiaries are minors, as would be likely, a deed of variation would not be accepted.

    Where there is concern that both nil rate allowances might not be fully utilised the solution may be to consider
    making a legacy to the surviving spouse or partner enabling full use of both nil rate allowances. A precedent
    to limit the effect of the survivorship clause in this circumstance, might for example direct:

    “If my [Husband/Wife/Civil Partner] is living at my death but fails to survive me by the period specified
    in sub-clause [ ] and there are insufficient assets in my [Husband/Wife/Civil Partner]’s estate to utilise
    fully the Survivor’s Nil Rate Band, I give, free of inheritance tax, to my [Husband/Wife/Civil Partner] a
    legacy of an amount equal to the Unused Nil Rate Band and I declare that the provisions of sub-clause
    [ ] shall not apply in relation to this gift.”

    Unlawful Killing:

    An issue which can be the subject of intrigue and some mystery is the rule of public policy that prevents a
    person from being allowed to benefit (as a beneficiary to a will) from his crime. A person who is convicted of
    the murder or manslaughter of a testator cannot receive a benefit from the testator’s will or from his intestacy,
    see Forfeiture Act 1982.

    The rule covers all forms of unlawful killing, including death by dangerous driving. The 1982 Act includes a
    reference to a person who has unlawfully aided, abetted, counselled or procured the death of another. Motive
    and the notion of moral guilt seem not to be relevant, except where the unsoundness of the victim’s mind or
    justifiable homicide is proved.

    Relief under the Act was refused to a person convicted of manslaughter on the grounds of diminished
    responsibility, see Dalton v Latham, sub nom Re Estate of Bernard Joseph Murphy [2003] EWHC 796 (Ch) [2003]
    WTLR 687. The court stated that Parliament did not intend to allow diminished responsibility to be a heading
    under which relief would be granted – the court held that the interests of justice would not be served by
    allowing relief in the circumstances of the case.

    In Re K deceased [1985] CH 85 the court heard argument that the rule of public policy does not apply to all
    manslaughters, only to those where there has been violence or a threat of violence. In the Court of Appeal the
    court affirmed the rule of public policy and upheld the first instance decision [1986] Ch 180, [1985] 2 All ER
    833.

    In the event that a beneficiary is disqualified from inheriting by the rule, the gift passes as if the beneficiary
    had died immediately before the testator, see In the estate of Crippen [1911] P 108. (This point of law remains
    upheld despite doubts about the identity of the body parts found, which led to Crippen’s conviction and
    execution.)

    If the beneficiary is a member of a class of beneficiaries then he is excluded from the class as if he had
    predeceased the testator and the remainder of the eligible persons making up the class benefit. If the
    inheritance passes as a joint tenancy the tenancy is severed and the beneficial interest vests in the testator’s
    personal representatives and the survivor as tenants in common.

    A person convicted of unlawful killing may however act as an executor or administrator of the deceased’s
    estate. Unless the convicted person renounces the appointment application must be made to the court under
    Senior Courts Act 1981, s116 for an application to pass over that person’s title to the grant.

    Relief under the Forfeiture Act 1982 (FA1982):

    A person convicted of killing another in circumstances where that person inherits under the deceased’s will
    may apply to the court to modify the rule of public policy as it affects him personally. The application must be
    made within 3 months of the conviction, see s(3) FA1982. If the person stands convicted of murder the court
    has no power to affect the application of the forfeiture rule, see s(5) FA1982.

    In cases other than a conviction for murder the court may allow the applicant to take, see s(4) FA1982:

    i) under the deceased’s will or the law relating to intestacy;
    ii) on the nomination of the deceased (for example pension benefits);
    iii) under a valid donation mortis causa;
    iv) the deceased’s share of jointly-owned property, and
    v) other property held in trust.

    The court has a discretion as to how it applies the forfeiture rule to the various assets and interests owned by
    the deceased, Re Forfeiture Act [1999] Pens LR1.

    S(3) of the 1982 Forfeiture Act expressly provides that the forfeiture rule does not preclude an application by
    the convicted person, except where the applicant is a convicted murderer, under the Inheritance (Provision
    for Family and Dependants) Act 1975.

    However in the case Re Royse, Royse v Royse [1985] Ch D 22 the court held that a woman convicted of
    unlawfully killing her husband was not able to apply under I(PFD)A1975 since the reason that she was not in
    receipt of reasonable financial provision was not due to the lack of provision by the will (one of the
    requirements under I(PFD)A1975 upon which the applicant must satisfy the court) but due to the rule of public
    policy.

    The upkeep and maintenance of graves:

    It is well-known that local authorities are generally short of funds and in future the austerity axe may fall
    equally on parks departments responsible for the upkeep of cemeteries. Testators who are aware and mindful
    of the need to provide funds for the upkeep of a grave may want advice on the method by which funds can be
    made available to their family or otherwise for this specific purpose.

    A gift for the upkeep and maintenance of graves takes effect as a trust of imperfect obligation and creates
    problems if any attempt is made to make the gift last for an indefinite period. As there are no lives in being –
    being a trust of imperfect obligation, as is the case with a gift of funds to maintain a grave – the perpetuity
    period is 21 years; (the alternative 125 years provided by s18 Perpetuities and Accumulations Act 2009 has no
    application).

    The simplest course of action would be to find a young member of the family prepared to accept the
    responsibility for the upkeep voluntarily. Alternatively it may be possible to make arrangements with the burial
    authorities, but the arrangements cannot last indefinitely.

    The Parish Councils and Burial Authorities (Miscellaneous Provisions) Act 1970 offers the means to maintain a
    grave without perpetuity problems. A local authority may enter an agreement with any person, for appropriate
    consideration payable to the local authority, to maintain a grave or memorial within a cemetery managed by
    that local authority. The maximum period of such an agreement is 100 years from commencement of the
    agreement. A testator may instruct his trustees to enter into such an agreement, but the trustees are not
    obliged to observe his wishes.

    If the grave is within a churchyard a legacy could be made to “the churchwardens of the church” with a request
    that the grave is kept in good order. The gift is made as a charitable gift for the “fabric of the church” and
    being charitable avoids the perpetuity problems. It should however be explained to the testator that the gift
    is not legally enforceable. The Incumbent and Churchwardens (Trust) Measure 1964 will apply to vest the
    property in the hands of the appropriate diocesan authority.

    Furthermore the testator may make a bequest to his trustees to provide for the upkeep of a grave “so far as
    they can legally do so and in any manner they may in their discretion arrange”, which was held to be a valid
    form of words, see Re Hooper [1932] 1 Ch 38. But note that as the trustees are acting as trustees of a trust of
    imperfect obligation they are not obliged to carry out the wishes of the testator. If the trustees choose not to
    carry out the terms of trust a resulting trust arises and the money held for this purpose results as part of the
    residuary estate.

    The care of animals:

    A gift of funds to look after a particular animal or animals is a valid gift, but one that also creates a trust of
    imperfect obligation and is restricted to a period of 21 years.

    On many occasions the testator will know of someone who is prepared to accept responsibility for the care of
    his pet (animal(s)) after his death. A gift of money to that person with instructions about the care of the animal,
    may encourage the chosen person to act in the care of the animal, where otherwise the expense of providing
    such care may be considered prohibitive. The legacy could be made i) together with a note of the testator’s
    wishes and dealing with the circumstances if subsequently no one is available to look after the animal(s) or ii)
    a gift of money together with the request that the legatee (beneficiary) gives an undertaking to carry out the
    care required; imposing rather more of a moral obligation upon the chosen carer. In the absence of such an
    undertaking a substitute legatee can be named.

    A third option is to involve an established charity, one that is known to operate specific schemes (programmes)
    designed to secure the welfare of animals in the event of their owner’s demise. For example a gift of cash
    together with an instruction that the animal be delivered to an officer of the designated charity who are given
    full discretion to deal with the animal as the charity thinks fit, which would allow for the animal to be put down
    if the animal is too old or unwell for a suitable home to be found. Whereas such a gift would not be expressed
    so as to bind the charity in using the legacy solely for the animal, in practice as much of the legacy as necessary
    would be used for the specific benefit of the animal.

    If for example, the testator chose the RSPCA their nationwide network of inspectors and officers would enable
    the charity to act swiftly for the benefit of the animal(s) following the death of the testator. The RSPCA
    operates a “Home for Life” service, with which pet owners can register. The service requests that the Society
    care for and rehouse pets after the death of the owner. The service can be used without the need to leave a
    legacy to the RSPCA, but registered owners are asked to provide details of any legacy that they have left to
    the RSPCA. As the RSPCA is a registered charity any legacy left is free of inheritance tax.

    Disadvantages of using a named charity could be i) if the owner has an overriding concern or even fear that
    his pet could be put down irrespective of the circumstances, then it would be preferable to select a person to
    look after the animal with precise instructions as to the animal’s welfare; ii) there is no guarantee that the
    legacy money left to the charity will be used for the care of his animal(s) and iii) the testator may decide against
    leaving a legacy to the charity concerned – although not obligatory the testator may feel obliged.

    There are charities other than the RSPCA that have developed schemes: for example, the Dogs Trust, (which
    was the National Canine Defence League) who operate a card-carrying scheme. With a little research and
    combined with drafting skills most pet-owners can be reassured that proper arrangements will be made for
    the welfare of their surviving lifetime companions.

    CPD

    The Society of Will Writers
    April 2015

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